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Japan's stock market has been on a tear, with the benchmark Nikkei index posting its best April in two decades to cap nine straight months of gains. The rally, fueled by the new government's stimulus policies, has been a boon for short-term investors. But could Japan, with two decades of economic stagnation behind it, again be attractive for long-term investors as well?

Skeptics abound. David Breuhan, a portfolio manager at Bloomfield Hills, Mich.-based Gregory J. Schwartz & Co., dismisses the rally as a result of a government "sugar shot" and warns the long-term-minded to stay away. But fund investors are plowing in -- to the tune of $10.4 billion over the six months through April 24, according to Lipper. And some international fund managers have gradually been adding Japanese stocks. The
Columbia Pacific/Asia
fund (ticker: CPAWX) has increased its Japan holdings to 35% of the portfolio, from 29% in recent months, says manager Daisuke Nomoto.

The optimism about Japan flows from the December election of Prime Minister Shinzo Abe, swept into office after promising economic shock therapy. "Abenomics" includes aggressive monetary easing, stimulus spending, and a push for reforms.

The falling yen is a concern for investors in U.S.-based funds since returns are diminished when translated back into dollars. Hedging strategies are sometimes used to address that risk, but many fund managers say the strong returns from Japan outweigh the currency drag.

As investors flooded in, stocks have risen to what Gunn describes as fair levels, with the Nikkei's price-to-current-earnings ratio around 14. Finding good values from here is getting tougher, says William Kennedy, manager of the
Fidelity International Discovery
fund (FIGRX). "We've had the beta rally, but there's still a lot of alpha to generate by getting earnings [prospects] right," he adds.

Japan continues to face serious risks. It's burdened with an enormous debt. Its population is graying rapidly, and there are too few workers to support the elderly. And some worry that letting the inflation genie out of the bottle is courting disaster. Charles Lewis Sizemore, chief investment officer at Sizemore Capital Management in Dallas, warns of hyperinflation that will "crush Japanese equities." He, like Breuhan, advises long-term investors to give Japan a wide berth.

BUT SOME FUND MANAGERS see a solid case for Japanese stocks.

Says Taizo Ishida, lead manager of the
Matthews Japan
fund (MJFOX): "I would argue that fundamentals of Japanese companies are even better today than five years ago, since they went through very tough times mainly because of the strong yen." Kennedy adds that Abe's program is much more than monetary stimulus. It includes increasing the number of female workers, developing tax-free zones, and lowering corporate taxes. "Abe is doing a lot of structural reforms, not just throwing money at the problem," he says.

If you're invested in Japan, keep an eye on Abe's progress in areas like cutting business taxes and loosening immigration restrictions. His results may determine whether the country's economy -- and stock market -- thrive after the stimulus wears off.